UPDATE 3-Dean Foods says exploring Morningstar sale

September 26, 2012|Reuters

* No buyer found, but sources say private equity isinterested

* Dean shares close up 5.5 pct

By Soyoung Kim and Martinne Geller

NEW YORK, Sept 26 (Reuters) - Dean Foods Co confirmedon Wednesday that it is weighing a sale of its Morningstardivision in what could lead to a break-up of the largest dairycompany in the United States.

The company said it recently decided to explore atransaction for Morningstar, the smallest of its three segments,as part of its goal to maximize shareholder value, confirming aReuters report earlier on Wednesday that cited unnamed sources.

The company's stock closed up 5.5 percent on the New YorkStock Exchange.

"We have not yet identified a buyer for Morningstar, but weknow this business possesses an attractive portfolio in agrowing marketplace and a top-notch management team," Dean Foodssaid in a statement.

"That said, we will only sell this business if we can do soin a transaction that maximizes shareholder value and ensuresthe future success of the business," the company added.

The company has hired investment bank Evercore Partners Inc to shop the business to potential buyers and hasattracted interest mostly from private equity firms, peoplefamiliar with the matter said before the company made itsannouncement. The sale could fetch more than $1 billion, thepeople said.

Evercore did not respond to requests for comment.

The news was not surprising, Stephens Inc analyst FarhaAslam said, since Dallas-based Dean last month said it plannedto spin off its WhiteWave segment, which sells Silk soy milk andHorizon Organic dairy products.

"Dean as a company is right now exploring strategicalternatives to unlock value. So the fact that they're exploringthis opportunity makes sense to us," Aslam said, callingMorningstar an attractive business. "It has very solid cashflow."

Dean has said it plans to sell 20 percent of WhiteWave in aninitial public offering, expected to raise some $300 million,and then distribute the rest to shareholders. It plans to use proceeds of the IPO to reduce debt.

Following a sale of Morningstar and the spin-off ofWhiteWave, Dean would be left with its Fresh Dairy Directbusiness. That is its largest business, but the most challenged,since selling milk is a low-margin business.

Costs are dependent on a range of volatile commodities fromfuel to dairy and passing on those costs to consumers is noteasy, since there is little brand loyalty and consumers often choose the cheapest brand.

In 2011, the company took a $1.9 billion charge to writedown goodwill in the dairy business, which it had built upthrough acquisitions over the years. Falling demand and pricesover several years had hurt the value of that business.

Dean Foods has improved its business recently, after cuttingcosts and working to offset weakened demand at its core freshdairy business.